Valdes Enterprises Is Considering Issuing a 10-Year Convertible Bond That

Multiple Choice

Valdes Enterprises is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. The stock currently sells for $40.00 a share, has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 5.00%. What is the estimated floor price of the convertible at the end of Year 3?

A) $794.01
B) $835.81
C) $879.80
D) $926.10
E) $972.41
Multi-part: